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tkelley on DSKBCP9HB2PROD with PROPOSALS

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Federal Register / Vol. 86, No. 5 / Friday, January 8, 2021 / Proposed Rules
management. By improving the Enterprises ability to absorb shocks arising from financial and economic stress, these measures, in turn, promote a more resilient mortgage funding market and U.S. financial system.
FHFA has supervisory guidance to address the risks arising from excessive reliance on short-term funding, such as short-term discount notes, that increases rollover risk both before and after the 2008 financial crisis. In 2009, for example, FHFA issued a supervisory letter that required, among other things, that the Enterprises develop capabilities to measure cash inflows and outflows daily for one year.
As previously discussed, AB 201806
incorporates liquidity risk management elements consistent with Basel Liquidity Principles. Under the AB, FHFA expects an Enterprises measurement of liquidity to include metrics for intraday liquidity, short-term cash needs e.g., 30 days, access to collateral to manage cash needs over the medium term e.g., 365 days, and a general congruence between the maturity profiles of the assets and liabilities. FHFA also encouraged the Enterprise to consider common industry practices and regulatory standards.
The proposed long-term liquidity and funding requirements would complement the proposed short-term 30-day and intermediate-term 365-day requirements. For example, these two long-term liquidity and funding requirements complement the 30-day requirements goal of improving resilience to short-term economic and financial stress by focusing on the stability of an Enterprises structural funding profile over a longer, one-year time horizon. In a financial crisis, financial institutions like the Enterprises during the crisis that lack longer-term stable funding sources may be forced by creditors to monetize assets at the same time, driving down asset prices, like those price declines in the PLS market and commercial mortgage backed securities market in the 2008
financial crisis. The proposed rule would mitigate such risks by directly increasing the funding resilience of the Enterprises, thereby indirectly increasing the overall resilience of the U.S. financial system.
The proposed two longer-term requirements would also provide a standardized means for measuring the stability of an Enterprises funding structure, promote greater comparability of funding structures across the Enterprises, improve transparency, and increase market discipline through the proposed rules monthly public disclosure requirements.

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Given the lack of retail and wholesale deposits and the relative simplicity of the Enterprises funding structure, FHFA proposes a simplified approach for its first long-term liquidity and funding requirement, which compares the amount of an Enterprises long-term unsecured debt i.e., longer than one year to maturity to the amount of its less-liquid assets in the retained portfolio. Under the proposed rule, the minimum ratio for this metric is 120
percent. While proposing a simpler approach than the U.S. banking regulators, the proposed rule makes conservative assumptions about what constitutes a less-liquid asset that requires longer term funding, like collateralized mortgage obligations CMOs noted below.
Because the Enterprises lack access to the discount windows of any of the twelve Reserve Banks in the Federal Reserve System, FHFA proposes that only assets that are eligible to be posted as collateral through the FICC can be counted as liquid assets and all other assets, even some agency securities like agency CMOs, would be considered less-liquid and require long-term funding.
To address the funding of other longterm assets, FHFA also proposes to include a second long-term liquidity and funding requirement based on the ratio of the spread duration of the Enterprises unsecured agency debt divided by the spread duration of its retained portfolio assets. The proposed rule would require that an Enterprises spread duration ratio exceed 60 percent.
This proposed long-term requirement will cause the Enterprises to maintain an appropriate amount of long-term unsecured debt and reduce rollover risk.
As a result of this requirement, the Enterprises will have incentive to better match the repricing risk of their debt with the repricing of their assets. It will also minimize the risk that an Enterprise would be forced to sell significant amounts of long-term asset into distressed markets.
2. Long-Term Liquidity and Funding Requirements The proposed rule would require the Enterprises to meet two long-term liquidity and funding requirements for the purpose of: i Reducing Enterprise debt maturity rollover risk; ii Ensuring that the Enterprises have sufficient longterm unsecured debt so they do not have to sell less-liquid assets into potentially stressed markets for at least one year;
iii Incenting the Enterprises to issue an appropriate amount of long-term unsecured debt; and iv Incenting the Enterprises to reduce the amount of
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less-liquid assets held in the retained portfolio that are not eligible collateral for inclusion in the 365-day liquidity requirement. These two long-term liquidity and funding requirements complement each other. The first ensures that less-liquid assets are funded with long-term unsecured debt.
The second ensures that the rollover and repricing of the unsecured debt is tied to the repricing of all the retained portfolio assets, not simply the lessliquid assets.
a. Long-Term Unsecured Debt to LessLiquid Asset Ratio The proposed rule would include a long-term liquidity and funding requirement that the Enterprises manage their issuance of long-term unsecured debt and their holdings of less-liquid securities to ensure that the ratio of the Enterprises long-term unsecured debt to its less-liquid assets is greater than 1.2, or 120 percent.
Under the proposed rule, the numerator is the three-month moving average of the UPB of all outstanding Enterprise unsecured debt with one year or longer to maturity. The maturity of the unsecured debt is based on the final maturity of unsecured debt and not the call date. The denominator is the threemonth moving average of all assets held in the retained portfolio that are not eligible collateral to be pledged to the FICC. For example, CMOs held by the Enterprises are not eligible to be pledged to the FICC and would be included in calculating the denominator.
The proposed rule would allow the Enterprises to exclude certain relatively liquid loans from the denominator. For example, the proposed rule assumes that cash window loans or whole loan conduit loans, and reperforming loans that have no delinquencies in prior six months, can be readily converted into FICC-eligible collateral. Therefore, these loans would not be included in the denominator. In addition, certain multifamily pass-through securities held by the Enterprises are eligible to be pledged to the FICC but other multifamily structured securities arising from the K-deals are not eligible to be pledged to the FICC and would be included in the denominator.
Question 13. Should FHFA broaden the definition of liquid assets to include certain non-FICC eligible assets, such as multifamily agency securities arising from K-deal transactions? If so, what criteria should FHFA use?

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